Businesses and economists are warning of a potential recession as Chancellor Rachel Reeves’s tax increases take a toll on the UK economy. A closely-watched survey showed that businesses are cutting jobs at the fastest rate since the financial crisis in 2009, excluding the pandemic, while economic growth has stalled.

S&P Global’s latest barometer of private sector activity showed minimal growth in December, with a reading of 50.5, just above the level separating growth from contraction.

Chris Williamson, chief business economist at S&P Global Intelligence, said: “Economic growth momentum has been lost since the robust expansion seen earlier in the year, as businesses and households have responded negatively to the new Labour government’s downbeat rhetoric and policies.”

He warned of “worse to come” as businesses face rising costs and a tougher sales outlook.

Mr Williamson said: “While the December PMI is indicative of the economy more or less stalled in the fourth quarter, the loss of confidence and increased culling of jobs hints at worse to come as we head into the new year.

“A further concern is that, with inflationary pressures also rising again, the Bank of England may be limited in its room for manoeuvre in cutting rates to ward off the increased risk of recession that the survey is indicating.”

He also added: “Firms are responding to the increase in National Insurance contributions and new regulations around staffing with a marked pull-back in hiring.

The survey pointed to significant job cuts in Britain’s services sector, which makes up over three-quarters of the UK economy. Employers blamed the Chancellor’s £25billion increase in National Insurance contributions for workforce reductions, describing it as encouraging “cutbacks to working hours and longer-term efforts to restructure workforces.”

A recession is defined as a prolonged period of decline in an economy. This is measured by negative growth of GDP (Gross Domestic Product), and a typical threshold used to identify the start of a recession is when the GDP declines for two quarters in a row.

GDP contracted by 0.1% in October, which was largely driven by a decline in activity within the hospitality sector, with pubs and restaurants experiencing a notably weak month. Experts have suggested that uncertainty in the lead-up to the Autumn Budget influenced this.

Economists have also raised concerns about the Chancellor’s fiscal rules, which limit borrowing to investment spending.

Ben Zaranko from the Institute for Fiscal Studies warned that a worsening growth outlook could force emergency tax rises or spending cuts in the March statement.

He told the Telegraph: “If the growth outlook worsens and a forecast for a small current budget surplus becomes a forecast for a small current budget deficit – very possible – the Chancellor might have to announce tax rises or spending cuts at the March Statement to meet it.”

Ms Reeves has stated that any measures would be found through spending and ruled out an early budget review.

However, Treasury officials have not ruled out tax increases, with a spokesman emphasising the Government’s commitment to balancing the books. It noted that meeting the fiscal rules is “non-negotiable” and that it will plan for “all scenarios”.

Meanwhile, analysts warned that Ms Reeves’ tax policies could further hamper economic stability. Elliott Jordan-Doak of Pantheon Macroeconomics highlighted that businesses are raising prices to offset costs, a move that could worsen inflation.

He noted: “The survey showed businesses were responding to the tax on jobs by cutting back on hiring and raising prices. The latter will be a particular concern to the Monetary Policy Committee.”

The Bank of England’s Monetary Policy Committee will meet on Thursday, December 19 to announce its next decision on interest rates.

Markets widely expect the UK’s Base Rate to be held at 4.75%, keeping costs higher for longer despite the economy contracting in the last quarter.